Gain Strategies
Global stocks put in another strong quarter to start 2024 as continued economic upside surprises, especially in the U.S. and falling bond market volatility, supported both the earnings outlook and valuations. Domestic large-caps put in their second straight quarter of double-digit returns and outpaced international stocks for the fifth straight quarter. Despite constant media attention on the Magnificent 7, performance in the domestic equity market was notably broader last quarter. In fact, the mega-cap tech-heavy NASDAQ 100, often considered a proxy for the Mag 7 and the AI trade in general, lagged the S&P 500 last quarter, a feat last seen in the fourth quarter of 2022. While growth beat value and large beat small, there were strong performances from some of the more cyclical parts of the domestic market, like mid-caps and the Energy and Financials sectors. International equity markets generally lagged last quarter, but Japan outperformed domestic large-caps even as the yen weakened. Meanwhile, China was once again a standout laggard internationally, dragging down the emerging markets as a whole.
In the fixed income market, investors repriced expectations for Federal Reserve policy as growth data surprised positively, and trend measures of inflation ticked up modestly. This repricing, coupled with the overbought state of long-duration bonds to start the year after the biggest return for core bonds since the late 1980s, caused yields to march steadily higher throughout the quarter in a roughly parallel fashion. Meanwhile, spreads on riskier debt, including high-yield corporates and emerging market bonds, declined during the quarter as measures of bond volatility declined despite rising core interest rates. Total returns were mixed during the quarter; higher-quality segments such as U.S. Treasuries and core investment grade bonds experienced minor losses, while high-yield credit, preferred equities, and bank loans notched modest positive returns.
Horizon’s Gain models maintained a total equity allocation during the quarter. We began the quarter positioned fairly neutral across our major allocation levers after a year of wide performance divergences between different parts of the global equity market. We increased our domestic positioning early in the quarter, especially toward growth, while trimming value, emerging market, Europe, and domestic small-cap exposures. Despite our move away from international markets in January, we increased our positioning in Japan, a tilt we held for the rest of the quarter. We increased our domestic large-cap growth positioning again in early March through more focused allocations to momentum and the energy sector at the expense of domestic small caps and broad large-cap value.
The fixed income allocation of the Gain models featured a heavy preference for corporate credit throughout the quarter. To begin the year, we held a slightly longer than benchmark duration profile, fairly substantial allocations to high-yield corporate credit, a modest overweight to mortgage-backed securities, and smaller diversifying exposures to international bonds and TIPs. As Fed easing expectations were pushed back during the quarter due to stronger economic growth, we decreased our duration positioning to underweight versus core bonds, lowered our mortgage exposure, and increased our exposure to investment grade corporate credit. We also positioned for a firmer dollar by rotating our local currency emerging market bond exposure into currency-hedged developed bonds.
Gain Equity Contributors and Detractors
Last quarter’s biggest contributors to performance in the equity portfolio were allocations to domestic large-caps, specifically quality, growth, and mega-cap technology. Domestic defensive dividends, Europe, and emerging markets contributed the least to returns.
Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, corporate credit exposures, specifically broad and higher-quality high yield, as well as short-term investment grade debt, contributed the most to performance last quarter. Long-term investment grade corporate credit, passive mortgage-backed securities, and long-term U.S. Treasuries contributed the least to performance in the first quarter.
Protect Strategies
Horizon’s Protect portfolios began the new year fully invested in their underlying allocations. Global equities trended strongly higher throughout the quarter and experienced very minor drawdowns, the largest of which was less than 2%. Meanwhile, core bonds were slightly negative regarding total return during the first quarter, while some of the riskier parts of the fixed income universe experienced modest positive returns. In such an environment, the Risk Assist algorithm remained in its default “off” position throughout the first quarter. All Protect models ratchetted during the quarter, a feature that establishes new levels for measuring future portfolio drawdowns.1 Recalibrating future de-risking activity in this way can serve an important role in helping manage portfolio values if the positive market trends we have witnessed recently meaningfully reverse course.
In line with our standard portfolio construction process, the tactical tilts in our Protect equity portfolios were generally broader and less focused than in our Gain portfolios. As such, we began the quarter relatively neutral across our main allocation levers and reallocated the portfolio only once during the quarter. In mid-January, we increased our domestic large-cap growth, quality, and mega-cap tech allocations while lowering our domestic value and emerging market allocations. In contrast to our Gain equity portfolio, the Protect portfolios held a small allocation to the low volatility factor to improve the interaction with the Risk Assist algorithm in shallow equity market drawdowns.
In the fixed income component of the Protect portfolios, our allocation changes mirrored those made in the Gain portfolios during the quarter. Our positioning reflected our more positive view of the backdrop for growth and the U.S. economy via meaningful overweights to corporate credit, including sub-investment grade rated debt. During the quarter, we lowered our duration positioning from slightly overweight to underweight as rates rose while trimming our mortgage-backed securities allocation. We maintained diversifying exposures to international bonds and TIPs throughout the quarter. We sought to insulate the portfolio against a stronger dollar by rotating out of local currency emerging market debt in favor of currency-hedged international developed bonds during the quarter.
Protect Equity Contributors and Detractors
The biggest contributors to performance in the Protect equity portfolio last quarter were the same as in the Gain equity portfolio, specifically domestic large-cap quality, growth, and mega-cap technology. International low volatility, domestic large-cap equal weight, and emerging markets contributed the least to performance in the first quarter.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, corporate credit exposures, specifically broad and higher-quality high yield, as well as short-term investment grade debt, contributed the most to performance last quarter. Long-term investment grade corporate credit, passive mortgage-backed securities, and long-term U.S. Treasuries contributed the least to performance in the first quarter.
1A ratchet refers to the resetting of the target loss tolerance threshold for the portfolio to a new (higher) value. Typically, in normal markets, Protect models ratchet with every 3%-5% appreciation in the portfolio’s value.
Spend Strategies
The positive trends for equities continued in the first quarter after the strong finish to 2023. Meanwhile, a portion of the strength in core bonds in the fourth quarter of last year reversed as a more resilient U.S. economy forced a repricing in Federal Reserve easing expectations. All of Horizon’s Spend models began the year fully exposed to their underlying growth allocations and saw no Risk Assist de-risking or re-investing activity during the quarter. We rebalanced the Spend models back to their full twelve¬ quarters of spend in line with our standard rebalancing process. Given the equity markets’ performance during the first quarter, Spend models were also ratchetted multiple times.
Spend Portfolio Positioning
Horizon’s Spend models feature a tilt toward risk-managed equities and an underweight to bonds relative to most retirement spending strategies. The market environment in the first quarter, which saw strong gains for global equities and modest losses for core fixed income, was generally supportive for our Spend portfolios. The underlying equity allocation, which outweighed domestic equities with a tilt toward quality and dividend stocks, generally matched global equities during the quarter. Meanwhile, our credit-heavy fixed income allocation exceeded core bonds in the quarter. A further tailwind to the Spend models came from current high yields on cash and cash-like instruments. Outside of the rebalancing activity discussed above, these allocations were little changed during the quarter.
Spend Contributors and Detractors
The biggest contributors to performance in the equity portfolio last quarter were broad international developed markets and domestic large-cap growth exposures. Allocations to domestic value-tilted dividends and emerging markets contributed the least to performance in the first quarter.
In our fixed-income allocation, exposure to broad high-yield corporate credit contributed the most to performance, while our core bond exposure contributed the least to performance.
Market Outlook
Back-to-back quarters of double-digit gains for the S&P 500 have left many investors channeling the Talking Heads, asking, “well, how did I get here?” That is especially the case with short-term interest rates still above 5% and the much-forecasted recession yet to materialize. Our view is that it is all about employed consumers with healthy balance sheets propelling economic growth. This dynamic supports corporate earnings and market sentiment, even if interest rates are more elevated than we became accustomed to in the 2010s. Our positive but selective outlook has generally served our portfolios well in the recent market action, and we see little to change our thinking as the second quarter begins. In the coming weeks, our focus turns to earnings season; fresh company-specific data will supplement our analysis of the incoming macro data. As we flagged last month, short-term volatility in markets would not surprise us, but it may also uncover opportunities across different slices of the equity and fixed income landscape. Horizon Investments is committed to helping you navigate what’s ahead through our innovative goals-based portfolio solutions, differentiated market analysis, and advisor-facing support. Thank you for your continued trust.
Disclosures
Past performance is not indicative of future results. The investments recommended by Horizon are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This information should not be considered to be a recommendation to buy or sell any security or to adopt a particular investment strategy. It should not be assumed that any of the transactions, holdings, or sectors discussed were or will be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Opinions referenced are as of the date of publication and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change
The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Dow Jones U.S. Select Dividend Index aims to represent the U.S.’s leading stocks by dividend yield. The S&P 500 Value Index is comprised of the value stocks in the S&P 500 Index. The S&P Small Cap 600 Index consists of 600 small-cap stocks. A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion. The MSCI Europe Index is designed to measure the performance of the large and mid-cap segments of the European market. The MSCI ACWI ex-U.S. captures large and mid-cap representation across 22 Developed Markets and 24 Emerging Markets countries, excluding the U.S. The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets countries. Individuals cannot invest directly in any index. Indices are unmanaged and do not have fees or expense charges, which would lower returns. References to indices or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change.
RiskAssist® is NOT A GUARANTEE against loss or declines in the value of a portfolio; it is an investment strategy that supplements a more traditional strategy by periodically modifying exposure to fixed income securities based on Horizon’s view of market conditions. While Risk Assist was designed with the goal of limiting drawdown, Horizon is not able to predict all market conditions and ensure that Risk Assist will always limit drawdown as designed. Accounts with Risk Assist® are not fully protected against all losses. Furthermore, when Risk Assist® is deployed (whether partially or entirely) to mitigate risk for an account, the account will not be fully invested in its original strategy. Accordingly, during periods of strong market growth, the account may underperform accounts that do not have the Risk Assist® feature.
The Real Spend® retirement income strategy is NOT A GUARANTEE against market loss, and there is no guarantee that the Real Spend® strategy chosen by an investor will lead to successful investment outcomes for part of or for the entirety of an investor’s retirement. This strategy is not an insurance product with payments guaranteed. It is a strategy that invests in marketable securities, any of which will fluctuate in value. Before investing, consider the investment objectives, risks, charges, and expenses of the strategy. Keep in mind investing involves risk. The value of an investment will fluctuate over time and will gain or lose money.
Horizon Investments, the Horizon H, Gain Protect Spend, Risk Assist, and Real Spend are all registered trademarks of Horizon Investments, LLC.
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NOT A DEPOSIT | NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED | CLIENTS MAY LOSE MONEY | PAST PERFORMANCE NOT INDICATIVE OF FUTURE RESULTS
